Analysts expect the price of crude palm oil (CPO) to fall towards RM3,000 per tonne, before settling into a range of RM2,700 to RM3,200 per tonne for the rest of the year. However, an increase in demand for biodiesel use could be a potential wildcard for the commodity.

Palm oil prices surged in the last three months of 2010, as production was disrupted by volatile weather amid strong demand.

The third-month CPO futures reached RM3,967 per tonne — close to a three-year high — last month but has since fallen to RM3,455 on Feb 24, and closed at RM3,546 yesterday.

CPO prices are expected to veer towards RM3,000 per tonne and average RM2,700 per tonne for the year, said ECM Libra Research in a report released on Monday.

“This is on the expectation of a recovery in palm oil production. Increased production will help ease supply concerns in the market and therefore keep CPO prices down,” said an analyst from the research house, noting the decline in palm oil production and exports in the past two months.

Malaysia’s palm oil exports fell 9.1% in February to 1.09 million tonnes, according to estimates by cargo surveyor Societe Generale de Surveillance. Intertek Testing Services said exports fell 10.4% to 1.1 million tonnes for the same period.Meanwhile, production in January fell 14.2% month-on-month and 19.8% year-on-year (y-o-y) to 1.6 million tonnes, as heavy rain from La Nina tampered yields. ECM Libra expects this condition to persist into March.

Exports for the month declined 5.8%, mainly due to a considerable 59% y-o-y drop in exports to China. Purchases by Pakistan, the US and India were also lower, although exports to the European Union (EU) increased.

“We expect CPO price to trend towards RM2,700 per tonne in the near-term, but our target average price for the year is RM3,200 per tonne”, said an analyst from OSK Research.

He added that the current price is considered “unsustainable” and that palm oil supply is expected to improve as supply from Indonesia recovers.

Plantation Industries and Commodities minister Tan Sri Bernard Dompok earlier said that CPO prices are expected to trade above RM3,000 per tonne on average this year, when addressing the media at a seminar last Friday.

Exports of palm oil products increased 2.8% to 23.6 million tonnes for 2010. China maintained its position as Malaysia’s biggest buyer followed by Pakistan, the EU, India, the US, Egypt and Japan. In total, these markets accounted for 68.2% of Malaysian palm oil exports in 2010.

Palm oil, which has traditionally traded at a discount to soybean oil due to perceived quality, excess supply and other issues, could see positive effects from the government’s initiative to promote biodiesel. This follows a five-year delay, from when the plan was first conceived in 2007, and the recent divergence between palm oil and crude oil prices.

Palm oil inventory is expected to benefit from the government’s plan to implement the use of B5 biodiesel in four months, as RM200 million has been allocated for the establishment of blending facilities. Additionally, the 10% sales tax on biodiesel will be removed and subsidies ranging from five sen to seven sen per litre are expected to be provided.

The implementation of the B5 biodiesel mandate will absorb 0.5 million tonnes of palm oil from the system. This is equivalent to 3% of Malaysia’s palm oil production last year and 35% of the current inventory level as of the end of January, said AmResearch in a sector report issued yesterday.

“The persistent demand for world commodities, restoration of biofuel output and stabilising equity markets should allow more buying momentum back to the crude palm oil market”, said LT International Futures in a report issued on Monday.

In contrast to the more bearish stance of local analysts and research houses, Prudential Bache commodities analyst Anne Frick takes a different view.

As reported by Reuters, Frick said that CPO prices could hit RM4,000 per tonne in the short term as the rising demand for biodiesel turns to soyoil supply, leaving less for vegetable oil export markets and increasing the demand for palm oil as a substitute.

“There is a short window of opportunity when palm oil prices could respond to tightening stocks,” said Frick.